A Regulated Broker and CFD Provider

There are a number of things to consider when searching for a CFD provider to trade with, but at a minimun, traders should ensure that the broker they are looking to trade with has financial stability and is properly regulated. It may seem a matter of common sense to make sure that the broker you intend to use is registered and regulated before depositing your trading capital. However, unless you know your way around the CFD world, it is easy to be fooled by impressive sounding identification and trade registrations which may give no guarantees at all.

The framework is there for security for your funds, and there are strict regulations in many countries where CFDs are offered. Unlike some other financial instruments, many CFDs are traded with a broker’s dealing desk rather than on a common exchange, and this means that there is scope not only for pricing variations between brokers, but also for brokers to overstretch themselves and then fail to be able to meet their obligations. This is why it is important to check on regulation.

We cannot stress sufficiently how important it is to select an appropriate CFD provider. Your CFD provider will act as a counterparty in a CFD trade – the financial company with whom the CFD account is opened – and so this means it is important to research the broker and ask certain questions before opening a CFD account and commencing trading. Firstly it is useful to inspect the the account-opening forms to check whether the CFD broker provides sufficient information about the risks associated with CFDs trading or whether he relegates these to the fine print. This might offer a clue as to how the CFD broker conducts its business and whether it is a serious entity that intends to to forge a lasting relationship with clients or otherwise.

Another point is that it is easy for a broker to claim that they are registered, but you should always check with the registering authority that the broker is listed, and that there have not been unresolved complaints against them. It is not unusual for the reprimand process to take some time, so even if the broker has current registration, there could be criticisms that have not been determined, and you would want to avoid this situation.

‘To adequately run their day-to-day business, a CFD provider must have enough capital and cash flow. Don’t take glossy advertising and a slick website as a sign that the provider is financially secure. Wherever possible, check the facts by reading the provider’s financial statements if they are available.’ Australian Securities and Investments Commission

A reputable CFD provider will be registered with the proper regulatory agencies of the nations in which they do business and adhere to the laws and regulations of those governing authorities. Most traders opt for brokers that have regulatory status in strong regulatory jurisdictions such as the UK (FCA) or the USA (NFA, CFTC), however do consider other regulatory jurisdictions – simply do your research.

The main regulating authorities that you are likely to come across include the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, the Bundeszentrale für Finanzdienstleistungsaufsicht in Germany, the Financial Services Agency in Japan and the Monetary Authority of Singapore (MAS). While it is possible to set up an account using a broker who is domiciled elsewhere from your country of residence, particularly with the ease of access of the Internet, should things go wrong you will find restitution far easier if you choose a broker in the country where you live, if possible.

What is the provider’s core business?

In practice you really want to be dealing with dealers who have expertise in their products and services. Some CFD providers operate as part of a larger investment house or foreign exchange provider. Depending on what you need from your CFD provider, you have to consider if they have the CFD expertise that you require on a wider product offering.

What is the CFD provider’s policy on the use of client money?

The law sets down some requirements for how CFD companies deal with their clients’ monies. Not all CFD providers handle and use client money in the same way. Some providers give your money more protection than others, so make sure you find out what a CFD provider’s policies are, and check how they compare to other providers.

How long has the provider been operating as a CFD provider?

You would like a reliable, dependable CFD provider that has a good track record in the industry. While regulation puts the power of law on your side, you should also check on the background of the provider and the broker’s financial strength. You want to know that the provider has sound financial backing — some are affiliated with a whole range of financial service companies — that they have been in business for some time, and that they have specific CFD expertise, rather than recently adding CFDs to their trading platform to complete their range of services. Just like trading in any instrument, there is a risk of loss connected to the financial standing of the CFD provider that is providing the service.

It may also be worthwhile to check if the CFD provider invests meaningful resources to training and educating its customers – and staff. Again, this would provide some indication as to its long-term commitment to its business.

You should make sure that your provider is well established and can offer you the customer service that as a new trader you will require. While you may want to seek out some references from satisfied customers, particularly if your trading account is large, be aware that such things can be falsified, or generated by friends and relations. A search on the Internet will often reveal flattering forum postings which on closer inspection are thinly veiled advertisements. Makes sure that all you believe about a broker is supported by facts.

Having said that, if you know other traders, perhaps by meeting them in a trading club, then you can seek out broker recommendations from them. Many brokers are honest and competitive, and work hard to establish and maintain their reputations. Unfortunately, as with all money dealings, there are some people who are either not good at business or set out to defraud. Be sure to do your due diligence and remember that the amount of capital you are entrusting to their care may be significant, particularly if you have success in trading, and you want to make sure that you can retrieve it when necessary. For this reason, it makes sense to call up a few providers and experience their service first hand or even visit their office to see their operations.